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Thursday, August 22, 2013

Money Hip Friends: Budgeting with a Plan

Remember this post where I said we were trying to get our smart friend to write a guest post for us? Here it is. (And for those of you who don't know her, Paige is one of those people that is always #1 (usually literally) at whatever she does, so she's a good one to listen to.)Paige, Lisa, and I are good friends from the BYU accounting program. She's a young mom of two little girls (2 ½ and 7 months), so life is busy, but having a budget and financial plan in place really helps her to simplify. She also loves to help others with their budgets and help them gain the peace of mind that comes from being in control of your finances.

I think I’ve made a budget, now what? Budgeting with a planFrom my experience, one of the main reasons that people fail at budgeting is because real life doesn’t always fit into an identical monthly mold. After you have worked and drawn up your first budget draft, there are three things to consider to make sure that you have a real, complete budget and sound financial plan:

(1) Importance of Sinking FundsMost initial budgets start out with a basic listing of income and bills. Add in gas and groceries and you have a budget, right? Wrong. Without a full budget, you often end up with more month than money and feel frustrated with the whole budgeting process. “Our budget says we should have $1000 leftover each month! Where did it go?”For example, this year for our family, we paid our semi-annual car insurance in January, moved in February, paid medical bills for our daughter’s NICU stay in March, took a vacation in April, bought lots of baby shower and birthday gifts in May, etc. Life is full of both expected and unexpected irregular expenses. That is where a sinking fund comes in.A sinking fund is where you save monthly for a one-time known expense, or set aside a monthly amount for unknown, yet predictable expenses.For example, car maintenance. You have a car and eventually that car will need new tires, oil changes, annual registration, maybe even a costly repair. But, either you don’t know when that repair will happen, or needing to update your registration is months away. However, if you allocate say $75 a month to car maintenance, then when those expenses arise, the money will already be there. No stress.Other typical examples of sinking funds would be Christmas, clothing, gifts, medical bills, and home maintenance. (2) Know your weaknesses

Often, people fail at budgeting because it just doesn’t seem fun. Or it feels very restrictive. We need to get out of debt, so... no fun, no eating out, etc. Very restrictive budgets are like overly aggressive diets. Cut too far too fast and you will fail.An important step of budgeting is to recognize, and acknowledge your weaknesses.For example, I consider myself to be decently frugal and wise with money, but I’m not that way with everything. I love to buy my little girls new clothes. Often matching new clothes that they will only wear a few times. Excessive? Probably. But, I love it and I recognize that in myself so our budget reflects a healthy “clothing” category. It fits with the rest of our financial plans, and so I don’t feel guilty buying matching swimsuits or cute new little dresses for church.Of course, you can’t have a desire or weakness to spend in EVERY category or you will never save money, but recognizing and allowing for a little “fluff” in your budget will go a long way towards having that budget be a successful tool for financial management.(3) Save and spend with a purposeWhen my husband and I were first married and in school, we lived very frugally. We continued to live that way even after I graduated and was working full-time at an accounting firm. Our financial mantra seemed to be, “spend as little as you can and save the rest.” I have come a long way in realizing that mindset did not reflect a healthy nor effective relationship with money. Spending as little as possible is not the end goal of a budget. We all need money to live life. For example, when we were first married my husband wore his contact lenses for twice as long as recommended to save money. Not the best idea. The purpose of money is to enrich your life- both now and in the future. Have a budget, stick to it, but don’t feel guilty or avoid spending money on necessities. That will most likely only end up costing more in the long-run.The second part of our old philosophy of “save the rest” has also come a long way. When we finally sat down and realized what we wanted to save for and set goals for that savings, we saved more and felt more motivated.We have retirement accounts. Savings accounts for our daughters’ college expenses. An emergency fund that we never touch. A house downpayment fund. A car replacement fund. Each fund is a separate account and is set-up with automatic transfers every month. Saving for something instead of just having a savings account is key to maintaining motivation with your budget.Summing upWriting out a budget is a great first step, but making sure that budget is complete, recognizing where you tend to spend extra money, and saving with a purpose will go a long way to making sure you actually stick to your budget. You’ll be surprised how good it feels to be in control of your money instead of having it control you.

-- Paige

Tell us -- How has the way you view money changed over your life?

Share -- What's the hardest part about making your budget fit real life?

So great. We use a "sinking fun" for car maintenance, property taxes, life insurance, car insurance, house maintenance, etc. It's actually a whole separate bank account that we transfer amounts to every month. Mostly because having a budget that wasn't accurate every month drove me crazy. So we more or less switched to an accrual system for non-monthly expenses. :) You explained it really well--thanks, Paige!

I'm glad to read this guest post. There are definitely multiple ways to do your budget. I have a goal of how much to spend versus save each month, but have never gotten so detailed in specific sinking funds. Might be a good idea in the future. For now, I like the way mint.com lets me say when I expect to pay my 6 month car insurance premium, etc. and have it worked into my budget that way.

Also glad to hear you do have separate bank accounts for different funds. I just have one checking and one savings, and have wondered if having multiple accounts would be more helpful or more of a pain. Something for me to think about for sure...

Yeah, maybe having a completely separate bank account seems extreme but it seemed pretty necessary to us when we bought a house in California and starting having a huge $3,000 bill twice a year (properly taxes). This way, we can tell at a glance exactly how much of our cash is truly available vs. set aside for a specific purpose. Before opening a separate bank account, even as disciplined budgeters, we were also trying to maximize our investments and not sit on too much cash (in excess of immediate needs + emergency funds) and that property tax payment snuck up on us a couple times and we had to scramble to move cash around. But that's never happened since opening a separate account. The money is always right there, set aside.

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